Wednesday, July 25, 2012

Here is an extraordinary slide of revenue by jurisdiction from the last Vodafone conference call...

Revenue is great in growing emerging markets (Turkey has become a land of smartphones). Revenue is bad in Italy, Portugal, Greece and Spain. The biggest driver there is mobile termination rates - these are markets where you pay to make a call to a mobile phone and these calls are discretionary.

The shocker though is Australia - and it has been a shocker for a while. Revenue performance in Australia is worse than any Southern European country.

This was entirely predictable.

In Australia Three ("3") merged with Vodafone and network performance was abysmal. This video went up on YouTube a little over a year ago parodying the (combined) company.

That video has roughly 200 thousand views - or 1 percent of the Australian population. These companies spent a lot of money on advertising and sports sponsorship: all wasted because of high credibility parodies and word of mouth. The results speak for themselves as this press article demonstrates:

Hutchison Telecoms Australia, 50 per cent stakeholder in Vodafone Hutchison Australia (VHA), announced yesterday afternoon that VHA lost 178,000 customers and reported a loss of AU$260.2 million for the first six month of 2012.

In what has been a disastrous 18 months for the company, following its infamous network outages in 2011, Vodafone's customer base slid below 7 million to 6.8 million, from a high of 7.5 million in 2010.

Note the scale of this stuff-up. The population of Australia is 22.6 million and there are roughly the same number of mobile phones. They lost 700 thousand customers or three percent of the population. [This is in a business where a one percent movement is a big change in share...]

My guess, in terms of lost customers and future profits the stuff up will wind up being worth something like a billion dollars.

And it takes a special customer-service incompetence to get this bad. One disgruntled customer who wanted to be let out of their contract because the service did not work wound up setting up a website (vodafail.com) to let customers grieve. Eventually Vodafail did let the victim out of their contract - but when it takes a successful social media campaign to get the company to do the right thing there is something deeply wrong with management. [Vodafail did not meet its part of the obligation - it did not deliver a phone service...]

The #vodafail tag is still active in Twitter as the following shows:

Yes - the company still converts iPhones to iPods and can take half an hour to update twitter. This problem is not yet solved.

But to be fair it is nowhere near as bad as during 2011 - and the frequency of tweets with the #vodafail tag is declining. Moreover the Vodafail website has gone (relatively) quiet noting that:

More recently, traffic to Vodafail.com has declined significantly. Having achieved the goal of raising awareness and promoting concrete action in early 2011, we have now reached the point of closing Vodafail to new complaints. The site will remain online for as long as possible as a reminder and an example of what is possible when we share our experiences.

This was an execution stuff-up of the first order. And it took until March 2012 for them to parachute in a new CEO (Bill Morrow) who has (rightly) declared that his task is network, network, network and network...

But he also has to get back trust - especially in a business that asks people to sign 24 month contracts and then won't let them out when they can't meet their end of the contract (their end being to make your phone work). He has made a start - allowing a 30 day let-out clause: Here are the terms:

The new Vodafone network - rolling out now

We're confident you'll be happy with our new network, so now we guarantee it.

Upgrade on a new Postpaid Mobile or Mobile Broadband Modem service and if you're not happy with your network experience you can cancel your contract within the first 30 days. No cancellation fees, just pay for what you've used, until cancellation is finalised1.

We're investing $1 billion on rolling out a new Vodafone network to give you:

Trust is a special thing in business. Once it is gone I don't know how much cricket you need to sponsor to get it back.

I don't envy Bill Morrow his job. And I wonder why it took 12 months after Vodafail was the but of musical parody to actually change the CEO. Surely there are enough network-technical-junkies in Vodafone who would like a 6 months emergency working gig in Australia to get the network fixed up.

The whole thing petrifies me because I own Vodafone stock (despite this problem) and they are doing a much bigger integration in the UK where they are merging with Cable and Wireless. Stuffing that one up would matter much more than my little local market.

Oh for the old days of stock picking

All of this makes me pine for the old days of stock picking. Vodafone (as a stock) is currently driven by two things:

(a) the terms on which it can extract value from its 45 percent stake in Verizon Wireless, and

(b) the value/profit proposition of their (strained) European mobile networks business.

The first is a corporate governance concern, the second a macroeconomics concern.

Australia - a pea-sized market at the edge of the world - is entirely driven by competitive positioning (once good, now less good) and execution (which has been abysmal).

In the old days stock picking was a matter of understanding competitive dynamics and business execution. If you bought a stock at a mid-teens multiple where the competitive dynamic did not deteriorate and the management executed you did fine. If you paid 12 times you did well. If you paid 9 times you made-out-like-a-bandit.

These days I spend much of my time considering whether macroeconomics can make a company blow up (macro concerns) or whether the management is going to steal from me (governance concerns).

Vodafone Australia and its problems remind me of the pitfalls of yesteryear's stock picking. Whether that world is more fun or less fun I will leave to readers imagination - but the outcomes were generally more palatable for the wider public.

11 comments:

Anonymous
said...

I don't believe the world of stock picking has changed all that much. The way I see it is everybody is talking about "macro" - media, blogs, marquee invesotrs - and that has somehow affected our thinking and made us believe that macro is more important than before in stock picking. Of course for some companies whether Europe blows up is very crucial (Banks), but as stock pickets u don't have to be hunting there, there are plenty of opportunities out there. I'm only a lowly analyst for a value shop, but I can confidently say my stock picks is not contingent on getting ANY macro calls right. Obviously if Europe blows up and we go into a recession then it's bad for business and these business will need a period to adjust, but adjust they will. The stock picks are protected by a good margin of safety, and if the macro blows up then it just means return goes from good to OK. Don't fool ourselves in thinking stocking picking has changed that much just because everyone is talking about it. It hasn't, it is still about buying good businesses at a discount.

I hate hate *hate* anything with the word Verizon in the name. They came this><close to getting my wife kicked out of medical school. We cancelled our mobile service with them, paid our last bill, dropped off our phones to the instore donation barrel etc etc. And then Verizon decided that, no, we HADN'T actually cancelled our service. We just weren't paying our bills. Which nuked our credit score. Not that they bothered to send us a letter about it. Nope, just sent it in to the credit report agencies. Which meant that when we went to get the next year's school loans, we couldn't. Because of a bad (bad badly bad bad) credit score. So one credit report later, we give Verizon a call. LUCKILY for us, we a) got a sympathetic Verizon employee who found the electronic records where, yes, we had notified them that we were closing our account and b) the bank statement showing the date that we paid out our contract. So all we had to put up with then was the 3 month wait while Verizon notified the credit report agencies of their mistake followed by that propagating out to raise our credit score with the banks. I am still furious with that POS company. I hope they rot.

"I can confidently say my stock picks are not contingent on getting ANY macro calls right."

Feel free to have those words etched onto a pre-engraved tombstone!

How did you fare last August??

When correlations go to one and multiples contract across the board returns are going very negative unless your net is close to zero.

Margins of safety are all very well but we are dealing with a somewhat binary situation: Euro blow up or not.Macro sentiment is driving out/underperformance far more dramatically than stock picking IMHO.

When it comes to telcos you should also have in mind that silicon valley would love to make them into dumb pipes and eventually they'll succeed. Timing is everything of course. In markets without MVNO price disruptions they'll be making outrageous profits in the mean time.

IMHO the amount of stuff that is bona fide macro independent is incredibly small now - event driven trades in highly regulated industries come to mind. The volatility of GDP forecasts is a good tell in this regard for a number of major economies, we really are investing in a fog. If you want to do something truly macro free then maybe short dated credit trades but anything with a very long and uncertain series of cashflows (like equity) is not particularly easy going without thinking very big indeed.

Governance is nothing new in EM so not as big a change for me. They were thieves in 2006 and they are thieves today. Oligarchs haven't changed much for me.

This is my first comment on this blog even though I have been a long time reader.

Now despite the high respect I have towards John, I would have to agree with the first commenter that stock picking hasn't changed that much.

In regards to macro. It's still hard to predict and I think a stock picker should still focus on bottom-up analysis. Now I do believe that we are, and will be for some time, in a weak macro environment. However valuations have also declined as well. So if before at mid-teens multiple you did fine, 12x you did well and 9x you made out like a bandit, in a weak macro environment you can adjust that down and it becomes at 12x you do fine, at 10x you do well and at 7-8x you make out like a bandit. Today you can find really good companies trading at these low multiples so we still have opportunities to pick good stocks.

When it comes to fraud and agency issues, this falls into the purview of the stock picker. In my opinion determining whether the management is fraudulent, dishonest, or abusing its position to enrich itself at the expense of shareholders should be foremost in a stock picker's research and shy away from those companies. I also don't think that we have more crooks today than we had in the past. (I don't invest in Asia so I can't say anything about that.) Maybe their actions are more hurtful today because we don't have a rising tide to cover up their work.

Thus I don't think that stock picking is fundamentally different today than it was in the past. Just as before we should work hard to identify good companies which we understand, with good and honest managements, conservative accounting, trading at a discount to their value.

Study after study for years has shown that the vast (though varying by study) majority of portfolio returns are explained by non stock specific factors. I doubt this is substantially different than it has always been.

The value investing anomaly, as noted by anonymous, is a possible exception. Though even there the picture is ambiguous. For example, Ben Graham lost 80% during the first years of the 30s value investing. While he still had twice as much money as he would have had if he had lost the 90% the market lost, still hardly a result a 'stock picker' would want to herald (both 'round numbers' though close as I understand it). As well, there is no particularly compelling reason to restrict analysis to the US market and Japan has hardly been an example of the rewards of value investing over the past few decades.

But Telstra certainly would have been a fine pick on the analysis you note, if one was a stock picker, no?Dan

In regards to Vodafone Australia they are in a self-inflicted race to the bottom.

They have the worst service, hence to attract customers they offer the lowest pricing and the most generous data allowances.

Price conscious shoppers, and especially heavy data users sign up with Vodafone causing further congestion on an already strained network, make the worst service even worse

Having the worst service, now made worse by having the lowest value customers using the highest amount of data, they lower their prices and increase their data allowances to attract more customers.

And so they continue.

Unlike other businesses where adding additional customers at incremental revenue has a positive impact on the bottom line and no negative impact on high value customers (think selling the last seat on an airplane or the last room in a hotel), adding new customers to a capacity constrained network reduces the utility for every customer, and means constantly lowering prices to meet customer satisfaction levels.

Vodafone would have been better off spending the money putting in a national network of string with cans attached to the end. The service would have been equivalent but the cost base considerably less

What you're saying is at first blush reasonable and closer examination less so. Of course you don't have to do global macro thus avoid EZ banks etc. The whole sticking point is figuring that our 5 years ago. That's the reason to spend more time on macro now: when the system collapsing or fundamentally changing is a real possibility you simply must take that into consideration.

John - the issue in my mind is what sort of moat do they have and what's the competition behind that. I can't really see any start ups in the space going toe to toe with the large wireless providers as it's simply cost prohibitive, thus the only issue is competition with other carriers. If that's relatively restrained then you have a money spinning investment in a static/flat growth business which isn't all bad if correctly managed.

Howard Marks probably put it best - you need to be aware of where you are in the cycle (business or credit) but don't need to forecast the outcome. If the investment is largely dependent on getting a favorable macro outcome, you need to really think about whether it truly has any margin of safety. Charlie Munger classifies investment ideas in 3 categories - yes, no, too difficult. Don't feel you can't just out things into the "too difficult" pile.

I would guess 5 years ago none of the euros zone banks would look cheap enough, especially when u considered that we were probably closer to the top of the credit cycle than to the bottom (what with all the lbo, cov lite loans, easy mortgages etc).

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The content contained in this blog represents the opinions of Mr. Hempton. Mr. Hempton may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Hempton's recommendations. The commentary in this blog in no way constitutes a solicitation of business or investment advice. In fact, it should not be relied upon in making investment decisions, ever. It is intended solely for the entertainment of the reader, and the author. In particular this blog is not directed for investment purposes at US Persons.